In the tightly contested race for Lt. Governor in 1978, Dymally's bid for re-election was derailed when Michael Franchetti, an aide to State Senator George Deukmejian, floated a false rumor that Dymally was about to be indicted. The story, coming days before the election, harmed the Dymally campaign, and Dymally lost to Republican Mike Curb. Franchetti later said that the source of the rumor was a Los Angeles Times reporter, who called the Justice Department trying to confirm its authenticity. Franchetti could not substantiate the rumor but included it in a report. The report was then passed to Dymally's opponent and later to a television reporter. Then-Attorney General Younger filed a letter of reprimand in Franchetti's personnel records, accusing him of a breach of responsibility.[5]

In the 1990s Dymally served as a paid lobbyist for the country of Mauritania, attempting to present the country as engaged in abolishing every remnant of slavery.[7]

Dymally came out of retirement and returned to the California State Assembly in 2002 when Assemblyman Carl Washington was term limited. He served for six years and then tried to return to the State Senate in 2008. However, he was defeated in the Democratic primary for State Senate election by Rod Wright. He died in Los Angeles, CA and is buried at Holy Cross Cemetery in Culver City, CA.[8][9]